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Many thanks to our Franchise, Distribution & Global Brand Expansion colleague Will Woods for co-authoring this post.

On October 25, 2023 the National Labor Relations Board issued a final joint employer rule (accompanied by a fact sheet) making it easier for multiple companies to be deemed “joint employers” under the law. This legal classification can have profound consequence by making independent entities now liable for labor law violations as well as obligations to negotiate with unions.

The new standard casts a wider net for “joint-employer” status

Under the new rule, an entity may be considered a joint employer of a group of employees if the entity shares or codetermines one or more of the employees’ “essential terms and conditions of employment.” The Board defines the essential terms and conditions of employment as:

  1. wages, benefits, and other compensation;
  2. hours of work and scheduling;
  3. the assignment of duties to be performed;
  4. the supervision of the performance of duties;
  5. work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline;
  6. the tenure of employment, including hiring and discharge; and
  7. working conditions related to the safety and health of employees.

How the new rule dramatically shifts away from the 2020 rule

In issuing the final rule, the NLRB rescinded the prior 2020 joint employer rule (a remnant of the Trump-era Board), which provided that a business is a joint employer only if it both possesses and exercises substantial direct and immediate control over one or more essential terms and conditions of employment-with “substantial” meaning control that is not exercised on a “sporadic, isolated, or de minimis basis. ” (For more on the 2020 rule, see our prior blog here.) The 2020 rule’s higher threshold meant a lower likelihood that businesses would be considered joint employers. The new rule’s impact on employers could be wide-ranging, and particularly difficult for non-unionized employers who are not used to navigating typical union activity such as being required to show up at the bargaining table, handling unfair labor practice charges, or dealing with picketing by a vendors’ employees (which would have previously been considered an illegal secondary boycott).

No direct (or even exercised) control required

The new rule rejects the previous rule’s focus on “direct and immediate control.” Instead, now, indirect or reserved control is sufficient to establish joint employer status. Thus, if a company has contractual authority over certain employment terms but never acts on that authority, that may be enough to establish a joint employer relationship. The same goes for a company that exercises authority over another company’s workers through a “go-between” company or intermediary, or a company requiring a vendors’ employees to follow certain health and safety rules while on-premises. In these instances, liability under the National Labor Relations Act, including the requirement to negotiate with a union, could ensue.

Implications for the modern workforce

In recent years, employers are increasingly utilizing a number of different types of engagement options, including using staffing agencies, employee leasing companies and engaging third-party suppliers to provide on-site or off-site workers. Employers who engage in alternative staffing arrangements and use third-party suppliers should review these relationships with counsel to evaluate whether the arrangement reserves authority to control or indirectly control at least one (and probably more than one) essential employment term such that modifications or changes should be considered.

Franchisors beware

Franchisors will need to be extremely careful under the new rule, which will make it easier for them to be considered joint employers. Board Member Marvin Kaplan (the lone member of the Board dissenting on the new rule) highlighted that the rule’s “vast reach” creates “significant risk” that franchisors can be held liable as joint employers of their franchisees’ employees.

Concerns (voiced by various parties during the rule’s comment period) include that:

  • Typical franchisees have unrestricted discretion to hire, assign work, set wages, benefits and schedules, and engage in day-to-day supervision, but franchise systems often require franchisees to follow strict brand standards. Under the new rule, these forms of control utilized to protect brands (or trade or service marks) could be considered material to the employment relationship, increasing the likelihood that a franchisor will be deemed a joint employer. (That said, the Board majority stated that many such forms of control will “typically not be indicative of a common-law employment relationship.”)
  • Franchisors’ monitoring of franchisees’ cleanliness and hygiene protocols to protect brand standards could make franchisors joint employers of their franchisees’ employees under the rule, under either (or both) the “work rules and directions governing the manner, means, or methods of work performance” and/or “working conditions related to the safety and health of employees” prongs.

There are also concerns about how franchisors may respond:

  • Some may exert increased control over their franchisees, undermining (or worse) the independence of franchisees (which is viewed as a fundamental benefit of the franchise model by many franchisees) and effectively turning them into “glorified managers.”
  • Some may drive distance between themselves and their franchisees, resulting in less guidance to help franchisees develop the skills necessary to manage successful businesses, and may curtail the provision to franchisees of helpful materials such as training and recruitment materials, or general educational materials on new regulations.

How does this relate to a US Department of Labor joint employer rule?

The NLRB’s new rule does not impact joint-employer tests applied under other employment laws, such as a Fair Labor Standards Act (FLSA) joint employer rule that may be issued by the US Department of Labor. Early in the Biden Administration, the DOL rescinded a Trump-era FLSA joint employer rule which considered four factors-the ability to hire / terminate, supervise and control schedules, maintain employment records, and set pay rates-and required companies to actually exercise control over one of the factors to be a joint employer. Though the Biden Administration said it would return to a “totality of the circumstances” economic realities approach for a new FLSA joint employer rule, at an April 2023 hearing then Labor Secretary nominee Julie Su reportedly confirmed that an FLSA joint employer rule was not on the DOL’s regulatory agenda. Currently, whether an employer is a joint employer under the FLSA is determined by a multifactor economic realities test that varies between judicial circuits.

Next steps for US employers and franchisors

The new rule will be applied prospectively to cases filed after its December 26, 2023 effective date. We expect the rule to be challenged in litigation given the critical nature of the joint employer question. We will continue to monitor and report updates here.

On the legislative front, US Senators Bill Cassidy (R-LA) and Joe Manchin (D-WV) have already announced they will introduce a Congressional Review Act resolution to overturn the joint employer rule. This bipartisan measure needs 51 votes in the Senate to pass.

In the meantime, employers should review their business practices and contracts to ensure they comply with the final rule, and train managers on the rule to better avoid inadvertently performing tasks that could give rise to joint employer allegations.

We recommend partnering with counsel to conduct a joint employer risk audit, a detailed examination of business operations and the company’s contractual arrangements with staffing agencies, suppliers and others to allow employers to assess and protect against liability before facing a claim. For more, please contact your Baker McKenzie lawyer.